spectre of inflation

If proof were needed of just how skittish investors are these days, it was clearly presented in New York on Wednesday night. No sooner had the US Federal Reserve jolted markets by announcing late in the day that it would be buying $300billion of long-term Treasury Bills, than the price of gold contracts for April delivery jumped by almost six percent from $888.70 an ounce to $940.10 according to the Wall Street Journal.

If proof were needed of just how skittish investors are these days, it was clearly presented in New York on Wednesday night. No sooner had the US Federal Reserve jolted markets by announcing late in the day that it would be buying $300billion of long-term Treasury Bills, than the price of gold contracts for April delivery jumped by almost six percent from $888.70 an ounce to $940.10 according to the Wall Street Journal.

Admittedly the jump was in thin, after-hours trading. Investors were spooked and fearful that the Fed's purchases would further push down interest rates, leading to a further weakening of the dollar. The greenback tumbled against most other major currencies, and gold rose as individuals scampered to the metal that is often seen as a safe haven.

Whether the mid-week jump will be sustained when markets have absorbed the full implications of the Fed's move - injecting more liquidity into the banking system to prime the real economy's pumps - remains to be seen. It is well known that the Fed is targeting an additional trillion dollars injection into the nation's money supply by purchasing mortgage-backed securities. But the planned purchase of Treasuries took the markets by complete surprise.

Fundamentally, the gold market had been consolidating, moving fairly sedately down from last year's $1,030 price peak. On the one hand we have had the likes of Citigroup reckoning that gold markets will remain robust driven by investment demand while economic uncertainties persist.

On the other hand, Neil Meader, Philip Newman and Gargi Shah - all of London-based metals consultancy GFMS - have pointed to a structural decline in gold jewellery demand in the developed economies and of dishoarding in developing economies such as Turkey and India where individuals are selling scrap gold to cover household expenses.

As for South Africa's gold miners - AngloGold Ashanti, Gold Fields and Harmony were confident that the improved rand-denominated revenue and profit performances of last year's final quarter would persist well into this year. And they should receive an additional boost should the Reserve Bank's efforts to cut interest rates on a more frequent basis lead to a steady reduction in the external value of the rand.

Which is all very well. But, to misquote Karl Marx whose views have lately recovered some of their popularity: There is a spectre haunting us - The spectre of inflation.

Pouring trillions into world economies might be a correct Keynesian approach to heading off recession, but it also exposes us to the risk of the sort of inflation we endured in the 1970s and 1980s. And we recall what that led to in gold.

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